Tax credits for college credits
By RichaRd Stolz
The most significant recent change occurred last February when Congress enacted
its $787 billion stimulus package, one component of which liberalized, for 2009 and 2010,
the former HOPE education tax credit.
The new American Opportunity Tax Credit
raised, from $1,500 to $2,500, the annual tax
credit available per student, and allows the
credit for all four years of a student’s undergraduate education, instead of just the first
two, according to Mark Luscombe, principal
tax analyst for the Tax and Accounting Group
of CCH in Riverwoods, Ill., and a tax columnist for Accounting Today.
Technically, the credit can be applied
100 percent to the first $2,000 in qualified
expense, and 25 percent against the next
$2,000. “They also raised the income limits
for phasing out eligibility,” Luscombe said,
“to between $160,000 and $180,000 for joint
filers and between $80,000 and $90,000 for
In addition, Luscombe noted that 40 per-
cent of the credit is refundable, so that “even
if you didn’t owe any tax, there is the potential
for getting some benefit.”
Finally, the scope of eligible educational ex-
penses covered by the American Opportunity
Tax Credit was expanded to include “course
materials,” which, according to the Internal
Revenue Service, means “books, supplies and
equipment needed for a course of study.”
The law is retroactive to Jan. 1, 2009, but
would not apply to costs paid in 2008 for an
academic semester beginning in 2009.
Income eligibility ceilings may render
these tax credits of no use to high-income
CPA clients, noted Neal Becourtney, CPA,
a partner in the Roseland, N.J., office of J.H.
tax-advantaged strategies to
fund children’s college edu-
cation continue to offer cPa
clients some relief from that
heavy financial burden, but
their value will vary widely
according to each taxpayer’s
Tax strategies lighten college tuition burden — to a point
incentives to participate in their 529 plan via
a tax credit or deduction, with some allowing
deductions for the entire 529 contribution.
Eighteen states offer prepaid college plans,
which also fall under the general heading of
a 529 plan. In effect, taxpayers pay for future
course credits based on today’s prices; the
implicit “earnings” on the value of those credits as tuition costs rise are untaxed.
Cohn: “We don’t see a lot of our clients being
able to take advantage of it.”
MOSS ADAMS MERGES IN
SAN DIEGO — Wealth management firm
Rowling, Dold & Associates, headquartered here, has joined Seattle-based
Moss Adams Wealth Advisors, the wealth
management division of accounting firm
Moss Adams. The combination boosts
Moss Adams Wealth Advisors’ assets under management to more than $1 billion.
The merger took effect Jan. 1.
The RDA team is led by Sheryl Rowling, who joins Moss Adams as a partner.
RDA co-advisor Lisa Saxton joins Moss
Adams Wealth Advisors as a financial
advisor. They will be joining the Moss
Adams San Diego office, which has seven
partners and over 50 staff providing
audit, tax and consulting services.
What they do take advantage of, Becourtney
said, is the workhorse of tax-advantaged
college funding — the 529 plan. These arrangements, of course, are state-adminis-tered investment or savings vehicles whose
investment income is exempt from federal
(and typically state) tax when spent on college educational expenses.
“There is no income limit — Bill Gates
could set one up,” Becourtney explained.
If used for non-sanctioned purposes, investment earnings are both taxed and subject
to an additional 10 percent penalty.
Although there are no explicit limits on annual contributions to 529 plans, federal law
requires individual states to set limits such
that total contributions don’t ultimately over-fund a 529 account based on anticipated educational expenses.
Annual federal gift tax exclusion amounts
($13,000 in 2009 per donor; $26,000 for married couples filing jointly) may be a practical
constraint for some clients, as the 529 account
is established in the child’s name. However,
federal law allows taxpayers to front-load five
years’ worth of maximum gifts to a child via
a 529 plan, according to Lisa Brinig, CFP, a
wealth management consultant in San Diego
with the cbiz Wealth Management Group.
CPAs need to be as mindful of states’ tax
treatment of 529s as they are of the federal
government’s, warned Saul Brenner, CPA, a
New York-based partner with CPA and business advisory firm Berdon.
Currently, 34 states give their citizens tax
HORSES FOR COURSES
A variety of other tax-advantaged college financing plans are available. Clients whose
parents have the means to help fund the college education of their grandchildren should
be encouraged to exploit their annual gift
tax exclusions by making gifts directly to the
child. Or grandparents (or, for that matter,
parents) can make tuition payments directly
to the college without using up their gift tax
exclusion, Brinig explained.
CCH’s Luscombe reminded CPAs that
Coverdell Education Savings Accounts, which
operate on the same basic after-tax contribution principle as Roth IRAs, while only allowing $2,000 annual contributions, should not
be overlooked. Coverdells are the only tax-advantaged savings vehicle that can also cover
pre-college educational expenses, including
elementary and secondary school.
A maximum of $2,500 of loans incurred for
college are deductible annually, Luscombe
explained. But relatively low income caps (
total phase-out at $150,000 for joint filers) limit
the value of that for many families.
Home equity loans may offer more flexibility. Interest on up to $100,000 in home equity used “for purposes other than the home
itself” is deductible. “But you’ve got to watch
the Alternative Minimum Tax,” cautioned
Brenner, since such interest is not deductible for AMT calculations.
Small-business owners, under certain
situations, might be able to steer tax-advantaged dollars to a child who works for the
family business through a Section 127 educational assistance program. “The business
owner can pay up to $5,280 a year tax-free
for higher education,” Brinig said. However,
such a program would have to be available to
other employees, and thus may be impracti-
TAX REFUNDS CAN GO
INTO SAVINGS BONDS
NEW YORK — The IRS has launched a
new initiative aimed at helping taxpayers build their nest eggs by allocating
a portion of their tax refund toward the
purchase of U.S. savings bonds.
Beginning with the 2009 tax return,
tax refunds can be used to purchase
Series I U.S. Savings Bonds by completing the appropriate sections of the tax
return. Savings bonds will be mailed
to taxpayers who choose this option in
denominations of $50, $100, $200, $500
and $1,000. The bonds must be held
for one year.
TAC OFFERS FINANCIAL
SCHOLARSHIPS TO VETS
BRYN MAWR, Pa. — The American College,
an educational institution devoted to
financial services classes, has created a
$500,000 scholarship fund open to veterans who have served in the U.S. Armed
Forces, including the Army, Navy, Marines, Coast Guard and National Guard.
Scholarships can pay for a veteran’s
entire tuition, depending on financial
need. Half-scholarships are also available.
Members of the armed forces must have
been honorably discharged from their
branch of service to quality. Scholarships
are available to all veterans, regardless
of discharge date. For more, visit